I am often asked by lawyers acting for landlords of retail premises leases whether to issue proceedings in Court or VCAT for arrears of rent.

The recent decision of Cavarno Nominees Pty Ltd v Melbourne Liquidation Centre Pty Ltd [2012] VCC 1599 in the County Court illustrates the risk of a false start if proceedings are issued in court.

This note discusses that case and sets out some other considerations when deciding whether to issue in a court or VCAT or arrears of rent under a retail premises lease.

Background

VCAT has exclusive jurisdiction to determine a retail tenancy dispute.[1]  However, a ‘retail tenancy dispute’ does not include a dispute relating ‘solely to the payment of rent’,[2] meaning that the courts retain jurisdiction to hear and determine claims relating solely to the payment of rent.

However, VCAT also has a general landlord and tenant jurisdiction (outside the operation of the RLA 2003).[3]  Consequently, when suing for rental arrears, a landlord has a choice between suing at VCAT or the appropriate court.

The appropriate court will typically be the Magistrates’ Court for claims of up to $100,000 and the County Court or Supreme Court for larger claims.

The risk of a ‘false start’

The biggest risk when commencing proceedings in court for arrears of rent under a retail premises lease is the risk of a ‘false start’.

If proceedings are issued and the tenant brings a counterclaim, the claim is no longer a dispute ‘solely in relation to the payment of rent’.  This takes the dispute outside the courts’ jurisdiction and into VCAT’s exclusive jurisdiction.  This invariably results in the court proceeding being stayed and the dispute starting again (usually in a mediation at the Office of the Small Business Commissioner followed by VCAT proceedings).

For a landlord, a false start causes frustration and wasted costs.

The recent decision of Cavarno Nominees Pty Ltd v Melbourne Liquidation Centre Pty Ltd [2012] VCC 1599 is an example of how a counterclaim, even if based on weak evidence, may cause a false start.

In that case, the landlord issued proceedings in the County Court seeking arrears of rent.  The tenant subsequently filed an application with the Office of the Small Business Commissioner seeking mediation of a retail tenancy dispute.  The tenant’s application to the SBC’s office alleged that the lease was invalid, that the retail premises were not fit for purpose and that the landlord breached the covenant of quiet enjoyment.  The judgment does not elaborate on those allegations.  His Honour Judge Lacava found that the Court did not have jurisdiction as a result of the tenant’s application to the SBC’s office and stayed the proceedings in the County Court.

Importantly (for the purposes of this note), Judge Lacava held that:

24 Mr Osborne submitted that the particulars of the retail tenancy dispute were vague and unlikely to succeed and that there was no evidentiary basis for them before the court. All of that maybe so. In my view in deciding the questions raised by the summons it is not necessary that I have to decide the strength or otherwise of the retail tenancy dispute application lodged properly by the first defendant. That may ultimately be for the VCAT to decide in accordance with the Act.

The landlord also brought a claim against the tenant’s guarantor.  The court held that:

23 It would also be wrong in my opinion to allow the plaintiff to proceed against the second defendant alone. That proceeding, whilst based on the guarantee of the lease and not the lease itself, is nonetheless dependent upon an assumption of the validity of the lease. It would again be an absurd result were the plaintiff to succeed in this court against the second named defendant alone on the guarantee and the VCAT subsequently held the lease to be invalid.

Also, it is unclear how the court will deal with the costs of the court proceeding.  However, if the landlord knew or ought to have known about the tenant’s counterclaim, there is a risk that the landlord could have an adverse costs order made against it.

Consequently, the risk of a false start should be a significant consideration for practitioners acting for landlords who are suing for arrears of rent under a retail premises lease.

Other considerations

Set out below are some other things to consider when deciding whether to issue in a court or the Tribunal for arrears of rent under a retail premises lease.  However, those considerations should not detract from the significance of the risk of a false start.

Some of the advantages of issuing in a court are:

1.  costs are recoverable on the relevant court scale;

2.  each court has its own enforcement mechanism;

3.  each court has a procedure for obtaining default judgment, so judgment can be obtained quickly against an absconding tenant;

4.  pre-judgment interest (eg under s 58 of the Supreme Court Act) can be recovered;

5.  there is no requirement to mediate at the Office of the Small Business Commissioner under s 87 of the RLA 2003.  This is an advantage if mediation is unlikely to be productive;  and

6.  a claim for rental arrears plus interest has been held to be a claim relating solely to the payment of rent,[4] so interest under the lease can probably be claimed.

Some disadvantages of issuing in a court are:

1.  the landlord’s claim is limited to rent.  This means it cannot claim:

(a) outgoings;

(b) make good costs;

(c) mesne profits, being damages in the nature of rent for the period in which the tenant is occupation of the premises after the termination of the lease.  If the lease was terminated early (eg by notice) the mesne profits may be substantial;  and

(d) loss of bargain damages (usually rent that would have been due for the balance of the old lease less any rent obtained from a new tenant).  This amount can be significant, particularly if the premises is difficult to re-let;  and

2.  there is no requirement to mediate at the Office of the Small Business Commissioner under s 87 of the RLA 2003.  This is a disadvantage if mediation at an early stage is likely to be productive.

Some of the advantages of issuing in the Tribunal are:

1.  there is no risk of a false start caused by the tenant’s counterclaim;

2.  outgoings, mesne profits, loss of bargain damages, make good costs and any other damages may be claimed;  and

3.  the Tribunal has jurisdiction to hear and determine a claim by the landlord against the tenant’s guarantor (see Athedium (Vic) Pty Ltd v Matchpoint Pty Ltd and Ors (Retail Tenancies) [2009] VCAT 1124; upheld in Tucci v VCAT [2010] VSC 425).

Some of the disadvantages of issuing in the Tribunal are:

1.  costs are generally not awarded, regardless of the outcome.  Legal costs can often consume a significant portion of the judgment and often mean the case can be uncommercial;

2.  there is no procedure for default judgment at VCAT.  This usually means that the landlord will need to appear at the Tribunal and prove its case, even if the tenant does not appear;

3.  the Tribunal has no enforcement processes.  Orders need to be registered in the appropriate court before they can be enforced;

4.  there is no provision in the VCAT Act for the award of damages in the nature of interest or an equivalent to s 58 of the Supreme Court Act.[5]  This is a particular disadvantage if there are no interest provisions in the lease.  The Tribunal probably has power under s 91(2) of the RLA 2003 to award damages in the nature of interest.  However, it appears that both entitlement to interest and the amount awarded are discretionary;  and

5.  there is a requirement to mediate before issuing, which is a disadvantage if there are little or no prospects of settling.  However, if the tenant has absconded, a failure by it to attend mediation will open the door for costs under s 92 of the RLA 2003.

Final note – the Federal Court

The landlord might conceivably issue in a federal court, eg if it wants to sue on provisions in a Commonwealth statute such as the Australian Consumer and Competition Law.

However, that is a note for another day.

Thanks to my colleague and friend Paul Duggan for his assistance with this note.

The decision referred to in my previous post in now attached as follows, for those interested in reading it:

McIntyre & Anor v Kucminska Holdings Pty Ltd _Retail Tenancies_ [2012] VCAT 1766

After passing through the upper house on 15 November 2012, the Retail Leases Amendment Bill 2012 (Vic) received Royal Assent today.  It will come into operation tomorrow.

At the time of this post, the Retail Leases Amendment Act 2012 (Vic) has not yet made its way onto the Victorian parliamentary website.  The consolidated version of the Retail Leases Act 2003 (Vic) on the Parliamentary website has not yet been updated to reflect the amendments.

A summary of the bill and its significance can be found in an earlier post here.

Importantly for practitioners, landlords will no longer need to report new or renewed leases to the Office of the Small Business Commissioner.

Thank you to Mark Schramm at the Office of the Small Business Commissioner for alerting me to this.

Sam Hopper and Imogen White

My friend and colleague Bill Stark has just posted on his blog a useful summary of the New South Wales Court of Appeal’s decision in BBB Constructions Pty Ltd v Aldi Foods Pty Ltd [2012] NSWCA 224.

In that case, the developer unsuccessfully sued Aldi for damages after Aldi withdrew from lease negotiations.  Executed leases had not been exchanged but the developer had started construction on the site.

Bill’s comprehensive post is available here.

It concludes with the following advice:

When engaging in negotiations of any kind, it is important to recognise that you may become legally bound to the deal if you are not extremely careful in addressing the issue of when you have reached an agreement.

It is always a good idea to state in writing early for example “We will not be bound by any agreement until formal documents are signed and exchanged”.

I agree entirely with Bill’s advice.

The reverse is, of course, also true – it is a good idea to ensure that the you have signed agreements before spending money in reliance on the assumed agreement.

For those interested in the Court of Appeal’s recent decision in the Willmott case, the decision was referred to recently by Beach J in the Victorian Supreme Court decision of Grant v Harlgate Pty Ltd & Anor [2012] VSC 464 (9 October 2012).

The decision is also relevant to conveyancing lawyers faced with an insolvent vendor.

In that case the vendor under a contract of sale was placed into liquidation.  The Liquidators sought to disclaim the contract of sale prior to settlement.  The purchaser stated in responsive correspondence that it considered the contract of sale to have been rescinded.  The purchaser sued the stakeholder (joining the vendor) to recover her deposit.

Relying on Warren CJ and Sifris J’s joint judgment in the Willmott case, the plaintiff sought repayment of the deposit on the grounds that disclaimer terminated the contract of sale.  The stakeholder sought to resist this on grounds that the purchaser’s equitable interest in the land created under the contract of sale survived the disclaimer.

However, neither party were pressing for settlement of the contract of sale and Beach J found that:

43 The present position is the liquidators have, on behalf of the vendor, disclaimed the contract of sale. The date for settlement has passed, and neither party to the contract of sale seeks its completion or settlement. The deposit was paid to the first defendant as a stakeholder, pending payment to the vendor, or otherwise, in accordance with the provisions of the Sale of Land Act. Circumstances entitling the vendor to payment of the deposit have never arisen. The plaintiff is entitled to the return of the deposit, together with interest. Alternatively, she is entitled to damages equivalent to the amount of the deposit and interest. It is no answer to the plaintiff’s claim that at the time of disclaimer, either or both of the parties to the contract may have had some pre-existing interest or right. What is clear from the evidence is that on and from 23 August 2012, the vendor has not sought to complete the contract (and has been prepared to treat the contract as being at an end); and that from 3 September 2012, the plaintiff has been content to accept this position.

44 Further, it is now tolerably clear (receivers and managers having subsequently been appointed on 19 September) that, without any default on the part of the plaintiff, the contract of sale will not be completed. The contact was terminated on 3 September 2012, if not on 23 August. In the circumstances, the plaintiff is entitled to judgment for the amount of the deposit, together with interest.

As I read the decision, the Court found that the parties to the contract of sale were both treating the contract of sale as being at an end and, one way or another, the contract would not now be performed.  As a result, the deposit was to be repaid and the question of the effect of disclaimer did not arise.

Thanks to my colleagues Garry Bigmore QC, Bill Rimmer and Matt Kennedy for discussing this case with me.